-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin </A> ----- Today's Lesson From At the Crest of the Tidal Wave by Robert Prechter, Jr. Despite a nearly unanimous opinion to the contrary, government cannot impose inflation to solve the deflation threat. Deflation in a credit economy results from a collective state of mind. It is not a mechanical phenomena, as it is to a far greater degree in currency based economies. This is particularly true in today's economy in the US. While the Fed and the government might have had some power to control interest rates temporarily in the past, they have created so much debt that they no longer control the market. The power to determine interest rates is entirely in the hands of creditors in what is now a multi-trillion dollar debt market. Because their collective state of mind is susceptible to a loss of confidence in government paper, the Fed has no choice but to tailor its actions to please them. Soon, the government will have to plead for bondowner's confidence as well, and act to keep it. Although many inflationists continue to claim that "all the government has to do is fire up the printing press," it simply cannot be done without destroying the bond market. If the government and the Fed were to collude in an attempt to inflate the money supply, that very act would panic bond investors, who would sell. Any attempted inflation would more than be offset by the disappearance of purchasing power that is currently being held in the form of bonds, notes and bills. Whatever liquidity the government tries to add to the system will come at the cost of falling prices for debt instruments, resulting in a net destruction of presumed wealth. The government, then, cannot combat deflation, which will run its course regardless of actions taken or not taken. ===== IMF Follies The IMF Loves Russia for Lies & Misuse of Funds Misappropriation of funds "is a tradition". When IMF officials admitted three weeks ago they had been lied to by Russia, it finally seemed that the other shoe had dropped. After all the broken promises of reform, the devaluations and the defaults, the agency that so continuously vouched for the credibility of the promise-breaker was admitting Russia lied. Now maybe we could get on with letting the markets value the promises instead. But along with that admission came the IMF announcement of a new loan facility for Russia. This time, the IMF was lending Russia just the amount Moscow needs to make good on its debt to the IMF, $4.5 billion. The Fund was saving itself the embarrassment (and financial hassle) of having one of its largest debtors go belly-up. But at the same time, it was handing Russia a financial lease on life. The irony here is that the IMF isn't mad at Russia. It has forgiven Russia. The IMF is mad at the thinking world for not giving the IMF the same indulgence. Currently, its wrath is directed at that quintessential center-left French newspaper, Le Monde. IMF Director General Michel Camdessus was given space in that newspaper yesterday to vent his "indignation at the untruths, the allegations or insinuations" in Le Monde about the diversion of billions of dollars from Russia's central bank to an off-shore investment haven. Le Monde editorialized two weeks ago in "Le FMI et la Russie" that if Russia had been deceptive, the IMF had been reckless and negligent. It's assertions are worth quoting at some length: "We discover that--in the style of vulgar swindlers, through companies installed in distant tax havens--one of the planet's big powers . . . misappropriates the international community's money, to facilitate the enrichment of a few oligarchs. Worse yet, we learn . . . that this misappropriation of funds is taking place, if not with the agreement of, at least with full knowledge of the facts on the part of the bigs of this world: the top officials of the IMF, beginning with its general director Michel Camdessus, but also, together with him, our finance ministers . . . all of whom are administrators of the IMF. "The culture of misappropriation of public funds is, of course, a tradition in Russia to which 70 years of state socialism have helped to impart a firm rooting. It cannot possibly be expected to disappear from one day to the next. Indeed, if anything, it is flourishing. Despite the hailed transition, generally speaking, the same men are at the controls in Moscow. . . . The oligarchs prospering in the shadow of the Kremlin will be able to continue their thieving." John Odling-Smee, director of the European II Department at the Fund, denounced the editorial and accompanying articles as "irresponsible journalism." The IMF's chin-forward defense goes like this: First, we're not guilty: It wasn't our money that went to the offshore fund on Jersey and we didn't know what the Russian central bank was up to. The IMF points out that it authorized Pricewaterhouse Coopers to look into the offshore deal. A draft of the audit firm's report is posted on its website. Second, we're not letting Russia off the hook. The offshore imbroglio constitutes, Mr. Odling-Smee says in his letter to Le Monde, "a fundamental lack of cooperation on the part of the Russian authorities, and a serious violation of Russia's obligations to the IMF." But then comes the bottom line, a defense of business as usual. New financing in Russia is warranted, according to "the considered judgement of [the IMF's] 182 member nations, in light of the economic policies that Russia is implementing," wrote Mr. Odling-Smee. No wonder a lot of people are finding this hard to swallow. Pricewaterhouse Coopers says its limited examination does not constitute a proper audit. It did not independently verify any facts provided. Access to information was apparently incomplete. The IMF says it knew that the Russian central bank held some of its reserves with subsidiaries in Europe, but the IMF was ignorant of the activities of the transfers to a Jersey-based investment company called Fimaco until this year. How come? And what's the point of arguing that it wasn't the IMF's--ahem, Western taxpayers'--money that went to Jersey? Money is fungible. Many questions remain, such as where all the profits from Fimaco's investments went. In one place in the report, PWC writes, "The IMF in Moscow has orally confirmed to us that the IMF had not stipulated any specific requirements regarding the investment of funds advanced to MinFin [the Ministry of Finance] under the Stand-by Arrangement. We do not know whether the IMF imposed any jurisdictional restrictions, or whether MinFin made any representations to the IMF about how any such funds were to be utilised. We note, however that the investment criteria in MinFin's investment plan differ from those adopted by Eurobank." Eurobank is the France-based subsidiary of the Russian central bank. The IMF and the Kremlin kissed and made up but the rest of us are left wondering what the IMF's inclination to forgiveness has brought its shareholders--or Russia. As Le Monde put it, "lending to Russia has become for the IMF second nature, thus a dangerous habit. It could one day provoke the anger of the Western taxpayers." Les mots justes, indeed. The Wall Street Journal, August 22, 1999 US Economy The Good, the Bad, and the Ugly Studies prove that 78% of statistics are produced by a random number generator IF THERE is one person who stands above America�s fledgling presidential campaign, it is Alan Greenspan. Most presidential hopefuls heap respectful praise on the head of America�s central bank and, from Al Gore to Elizabeth Dole, have recommended that he should be reappointed when his term as Federal Reserve chairman formally ends next May. From Wall Street to Washington, Mr Greenspan is credited with an unsurpassed understanding of America�s economy, as he has steered monetary policy to achieve rapid growth, low employment and low inflation. Over the next few months, his acumen will be more necessary than ever. On one side, there are reasons aplenty to fear inflationary pressure. A batch of recent economic statistics hinted that tight labour markets are at last pushing up wage costs. Financial markets tumbled in early August after the employment cost index, a quarterly measure of overall labour costs, leapt 1.1% between April and June, compared with 0.4% in the first quarter. In the year to July, hourly earnings rose by 3.8%, up from a low of 3.5% in the year to May. Analysts were convinced that these numbers provided enough evidence of an overheating economy to guarantee another quarter-point rise in interest rates, or maybe more, when the Federal Reserve next meets on August 24th. On the other hand, inflation itself has not yet picked up. Statistics released in the past week show that the major inflation gauges�the producer and consumer price indices�are still extremely well behaved. Producer prices for finished goods rose a mere 0.2% in July (compared with 1.5% a year ago), and consumer prices only 0.3% (2.1% a year ago). This news calmed the financial markets. Although the consensus on Wall Street is still that the Fed is likely to raise rates next week, some economists suggest that this is no longer necessary. In fact, it is a mistake to take either the labour-market figures or the inflation statistics too literally. Wage pressures are building up slightly, but this is after months of very modest wage gains. At least part of the April-June rise in the employment cost index was a payback for an extraordinarily small rise in the first three months of the year. Still, it is clear that the labour market is tighter than ever, and on an unsustainable track. More than 300,000 new jobs were created in July, much more than most analysts had expected and three times more than the growth of the labour force could normally sustain. The number of unemployment claims is at its lowest in this economic cycle, and virtually every Federal Reserve district has noted widespread labour shortages. More important, the benign inflation numbers should not be taken at face value. First, the central bank has to worry about future inflation threats when it decides whether or not to raise interest rates. Since it takes several months for the full effects of changing interest rates to be felt in the economy, it can be dangerous to wait until there is actual evidence of accelerating prices. Moreover, even today�s figures show a worrying price pressure behind the benign headlines. Oil prices have risen sharply, and commodity prices in general are firmer. As the economies of Europe and Asia show signs of more vigour, the dollar has been sliding, especially against the yen. On August 18th it passed �112, its lowest since January. Higher commodity prices and a weaker dollar have removed an important source of imported disinflation for America, and firms� input costs are now rising. The producer-price index for core intermediate goods�those goods such as paperboard and plywood that firms use as part of the production process�has risen at a 4% annual rate over the past three months, the biggest rise in four years. Of course, there is no certainty that firms will pass on higher input prices as higher goods prices (if firms raise their productivity they can absorb the extra cost). But, as Bruce Kasman of J.P. Morgan points out, every stage of Federal Reserve tightening over the past two decades has been accompanied by an acceleration of core intermediate producer prices. How much the Federal Reserve must raise interest rates depends on how far the economy can be trusted to slow by itself. At first sight, it seems to be doing so. Recent retail-sales figures suggest that consumer spending may be slowing. According to economists at Goldman Sachs, consumer spending, after adjusting for inflation, is likely to rise by 3.6% at an annual rate between July and September, certainly much less than the 6.7% real rise in the first three months of the year. But history suggests caution. America�s economy in recent years has continually surprised analysts with its strength. And the next few months could be no exception. Consumer spending is still strong by historical standards. The housing market, an important engine of demand (because people have realised capital gains as they sold their houses, received cash as they refinanced their mortgages and boosted construction demand by building new houses), is still extraordinarily vigorous. Despite sharply higher mortgage rates, housing starts rose by 5.7% in June, though the rate of mortgage refinancing has slowed sharply. The replenishing of firms� inventories could provide another short-term boost to growth. Currently, inventories are low. Between April and June firms added only $19.4 billion to their inventories compared with $38.7 billion in the first quarter. Most analysts expect a sharp rebound during the next few months, and as companies prepare for the uncertainties of the millennium bug they may well add to their stockpiles. Add to this a strengthened demand for exports as economies in Europe and Asia accelerate, and it is hard to see much chance of the economy slowing down. Two important�and related�uncertainties could cloud this picture. One is the stockmarket. If Wall Street shrugs off higher interest rates entirely, as it did in June, an orderly slowdown will be harder to achieve. Conversely, a big correction in the stockmarket could precipitate an uncomfortably sharp slowdown. The other unknown is how foreigners will behave. America�s trade deficit rose to a record $24.6 billion in June, and the country is heading for a current-account deficit of 4% of GDP this year. As the economies of Europe and Asia perk up, foreign investors who are financing this sizeable deficit may demand substantially higher interest rates to do so. The recent slide in the dollar and the strengthening in bond yields could be but the beginning. If foreign sentiment turns sharply, America�s much-needed economic slowdown could occur more suddenly than anyone expected. And Alan Greenspan would then no longer seem a demi-god. The Economist, August 21-27, 1999 Fin-de-siecle Hundreds Barbecued in Tanzanian Witch Hunt "I've just been feeling your pain. Honest. That's why my eyes are red." LYNCH mobs have killed hundreds of Tanzanians whom they accuse of witchcraft as black magic hysteria sweeps East Africa. Most of the usually elderly victims have been beaten or burnt to death by gangs of youths. Some old women have been singled out simply because they have red eyes - regarded as a sign of sorcery by their assailants. The condition is actually caused by years of toiling in smoky kitchens cooking family meals. Tanzanian police have linked some of the recent killings, especially in the southern region around Mbeya, to a bloody trade in human skin and organs. The body parts are used in rituals to protect homes from evil spirits, increase harvests and lure clients to businesses. Police have arrested several suspects, including one who was detained for chasing a small boy. A search of his clothing revealed he was carrying a bloody human jaw, tongue, nose and teeth. Police say 357 suspected witches have been killed in the past 18 months, but the Ministry of Home Affairs believes that the true figure is much higher. A departmental survey said as many as 5,000 people were lynched between 1994 and 1998. Tanzania's minister of health, Dr Aaron Chiduo, blamed the killings on a lack of education in an overwhelmingly rural and poor society. Witch-hunting has a long history in Africa but the allegations of sorcery have also been used to cover up more prosaic motives for murder. The upsurge in witchcraft killings in Tanzania comes as neighbouring Kenya is gripped by a frenzy of Satanist scare-mongering after an official report concluded that the country's government and business circles are riven with devil-worshippers. The report, from the Presidential Commission into the Cult of Devil Worship, was written in 1995, but its contents had been kept secret until it was leaked to the press this month. There are now fears that its findings will trigger a wave of killings and mob attacks similar to those in Tanzania. Presenting lurid but unsubstantiated testimony from witnesses who described human sacrifices, blood drinking and cannibalism, the commission concluded that Freemasons, Mormons and Jehovah's Witnesses were among the dozens of organisations guilty of Satanism. The report also condemned Rastafarians and loud music played by Kenya's thousands of taxi drivers. Despite a failure to name individual suspects or provide convincing physical evidence to back its claims, the report has worried many ordinary Kenyans and fed the potentially dangerous rumour mill. In one secondary school in the western Nyando district this week students were sent home after threatening to riot when a newly-built pond was unveiled with a plaque showing it had been partly funded by local Freemasons. At Homa Bay on Lake Victoria the municipal council was forced to scrap its colourful abstract logo after residents and employees complained they could make out the pattern of a snake - a Satanic symbol - in its design. Even President Daniel arap Moi has entered the national debate, though he did little to ease concerns by failing to dismiss the report. However, many Kenyans have been outraged - and embarrassed - at the report's findings and the reaction they have provoked. They say that the commission was staffed by conservative Christian clerics and that many of the organisations labelled as fronts for devil-worshippers, such as evangelists, are those most successful in taking support away from the mainstream churches. However, the report's authors are standing by their claims. "The report is a reality. Let every Kenyan understand we did not get the report from the air, but from real people," said the Rev Bernard Muindi, a commissioner from the Presbyterian Church of East Africa. The London Telegraph, August 22, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance�not soapboxing! 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